Britain’s four largest banks could need up to £35bn in new capital because of the way lenders have been allowed to understate the risk of the assets they hold on their books, according to the Bank of England in its latest Financial Stability Report.

The Bank of England warned that Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland could be overstating the amount of loss-bearing capital they currently hold by between £5bn and £35bn.

Lenders would require between £12bn and £35bn to close this capital shortfall, according to the Bank’s financial stability report based on its concerns over the state of the banking system.

Sir Mervyn King, Governor of the Bank of England, said the Financial Services Authority would “begin to take action immediately” to assess the value of banks’ assets and to set how much extra capital lenders will need to cover any new losses.

Shares in the four banks appeared unaffected by the Bank’s gloomy forecast and were all up in trading up this morning.

The Bank of England’s warning followed several months of increasingly stark statements from senior officials about the need for lenders to bolster their core capital levels to cope with new problems in the financial system.

Sir Mervyn is known to think that despite Britain’s banks maintaining amongst the highest capital ratios of any of their peers their loss buffers still remain inadequate to meet the losses they could be forced to take in the coming years.